Consumer Finances Getting Stretched

Consumer Finances Getting Stretched

The recent economic data coupled with what we are hearing this earnings season paint a picture of consumer finances getting seriously stretched.

Yesterday we learned that personal income growth stalled out in June, unchanged from May. The 3-month moving average shows slowing in income growth.

With the decline in income, we have also seen consumers spending less, although still at relatively strong levels, stronger than income growth would suggest.

Without incremental income to support spending, consumers have reduced their savings rate well below historical norms.

But the story doesn’t end here. While the mainstream financial media keeps telling us how great the consumer is doing, ignore the prior charts (cough, cough), we are seeing loan loss provisions on the rise. The average charge-off rate for large U.S. card issuers increased to 3.3 percent in the second quarter, the highest level in four years and the fifth consecutive quarter of year-over-year increases. All nine of the largest issuers: JPMorgan Chase (JPM), Citigroup (C), Capital One Financial (COF), Discover (DFS), U.S. Bank (USB), Wells Fargo (WFC), Bank of America (BAC), Synchrony Financial (SYF) and American Express (AXP) experienced increases for the quarter.

Capital One Financial beat expectations for both revenue and earnings but increased its charge off rate to 5.11 percent from 4.07 percent in the same quarter last year. The company elected to not provide guidance for anticipated defaults for the coming year.

Synchrony Financial, the largest store credit card issuers in the U.S., reported second-quarter earnings that beat Wall Street estimates largely due to consumers taking on more debt. Despite a strong showing last quarter, loan losses continued to worsen and were a big topic during the earnings call. The company’s net charge-off rate rose to 5.42 percent from 4.51 percent the prior year. Provision for loan losses in the second quarter rose 30 percent over the prior year.

American express saw loan loss provisions growth 26 percent year-over-year.

Bottom Line: Spending can only grow by earning more or borrowing more. With the savings rate in decline and default rates on the rise while income growth continues to weaken, we are seeing additional evidence that we are in the later stages of the business cycle.


Improving Data? Income or Tax Receipts

Improving Data? Income or Tax Receipts

This morning we learned that Real Disposable Personal Income rose at the fastest month-over-month rate since April 2015, up 0.6 percent.

Looking at a year-over-year basis, real Disposable Personal Income rose at the fastest rate since October 2016. That growth in income however, didn’t translate into spending with Personal Consumption Expenditures nearly flat, with an increase of just 0.055 percent on a month-over-month basis.

On a year-over-year basis, May’s spending was up 4.2 percent, although the rate of increase has been slowing since March.


Rising income levels are supported as well by recent comments we’ve seen.

“Labor, we continue to see some pretty good inflationary pressure…there’s 3% to 4% wage inflation in our labor number, right now; we’re able to offset some of that with productivity enhancements. But labor continues to be something that we’re focused on” —Darden CEO Gene Lee (Restaurants)

This is consistent with the Consumer Confidence data we’ve been seeing that show strong sentiment for Current Conditions, but Expectations have been trending down significantly. Folks feel pretty good about their situation today, which makes sense if incomes are rising at a faster rather, but aren’t too confident in the future, which would reasonably result in less spending and more saving.

Looking at federal tax receipts gives us a different image and shows an economy in no way accelerating, which is consistent with much of the data we have been discussing recently, but contrasts with today’s income data. In fact, individual income taxes on are track to drop by 0.2 percent of GDP this year.

Back to the positive side, the recent Cass Freight Index Report gives us cause for optimism. Cass shows that both Shipment and Expenditures have been positive for five consecutive months and even more importantly, look to be accelerating. This index had been in negative territory for 20 months, breaking out back in last October, making it one of the first indicators that a recovery in freight had begun.

If we look at the typical trends during a year, 2017 is shaping up to look pretty good as well.

This more optimistic view is supported by the Baltic Dry Index.

However, we do have some concerns when we look at the Index today. After having moved up since February 2016, with a few bumps along the road, we now see the 50-day moving average has turned negative and the 200-day moving average looks to be flatlining. The 50-day had turned negative earlier this year, then reverted, but this is the first time we’ve seen the 200-day flatlining since the start of this uptick, which could indicate a material change in direction. This could then be reflected later in the Cash Freight as this index revealed an upturn prior to Cass and could be foreshadowing a directional change again.

Bottom Line: Consumers feel good about today which makes sense with improving incomes. They are nervous about the future though, so spending isn’t keeping up with incomes. When we look at other data coming in, we see that businesses have excessive levels of inventory on hand, which is more problematic when spending declines. How long can transports look good when businesses have too much inventory and consumers are spending less? 

Taking a step back we recall that 1.5 million baby boomers are hitting 70 every year for the next 15 years and most don’t have enough in savings and on top of that, Millenials are saddled with record levels of student loan debt. 


Q1 GDP Flops as Expected – now what?

Q1 GDP Flops as Expected – now what?

Friday the first estimate for Q1 GDP was released and as we’d expected, it was a serious flop at just 0.7 percent growth for the quarter versus expectations for 1.0 percent. The weakness was driven primarily by weak consumer spending which was the weakest since the fourth quarter of 2009. Meanwhile, consumer sentiment is still rockin’ and rollin’ along with optimism and the talking heads on mainstream financial news are quick to brush this quarter off to the usual weather and this year to the late tax refunds – it’s always sumthin’!


This morning we learned that Personal Income rose just 0.2 percent in March versus expectations for 0.3 percent and last month’s increase of 0.4 percent while Personal Spending was flat versus expectations for a 0.2 percent increase and a 0.1 percent increase the prior month. Personal Consumption Expenditures Index fell 0.2 percent in March, the first drop in this measure of inflation since February 2016 and the biggest one-month drop since January 2015.

We’re not terribly convinced of this whole “seasonal” thing when wage growth remains elusive despite supposed “full employment.” You know things are feeling toppy when the use of ” ” increases!

The ISM Manufacturing Index also came in below expectations, falling to 54.6 versus expectations for a decline to 56.5 from 57.2 in March. Looking at the individual components of the report, 10 of the 11 are improved on a year-over-year basis, but on a month-over-month basis, 7 of 11 declined. The employment component saw its largest monthly drop since November 2008, which doesn’t bode well for this Friday’s employment report. On a more positive note, the export orders component hit its highest level since April 2011, which indicates considerable strength from overseas markets. The other manufacturing measure, Markit Manufacturing PMI came in unchanged from flash estimates and met expectations, but was also sequentially weaker.

Construction spending dropped 0.2 percent in March and has been fairly weak on a year-over-year basis. Last week the Trump administration announced a 20 percent tariff on lumber imported from Canada. This type of lumber is typically used in residential single-family homes and according to the National Association of Homebuilders, tariffs between 15 percent and 25 percent are expected to increase the price of new homes by an average of $1,000. This presents another headwind to the already weak construction sector which, when it comes to at least home building, has claimed that one of the major headwinds impacting the historically very low inventories is the level of regulation/permitting involved.

On a more positive note with construction, on a three-month annualized pace, construction spending has been the strongest since March of 2016 with two consecutive months of double-digit 3-month annualized spending for the first time since 2015. Residential Housing Investment has improved by 26 percent over the past three months.

At the other end of the spectrum, Office Construction is down almost 15 percent at an annual pace in the last three months, the slowest pace since April 2013, confirming the data we’ve seen indicating rising vacancies and falling rental rates.

Bottom Line: While sentiment remains robust, the hard data paints a picture of a more mixed economy with some concentrated areas of strength, while the overall picture remains an economy that is growing at a very subdued pace. As usual, the mainstream financial media is claiming the first quarter results can essentially be dismissed as due to seasonal effects, but with the various confirming data points we’ve seen, we still believe that we are in the very late stages of the business cycle and are likely to see continued weakness in the months ahead.

Consumers Spend More in December, But Ouch Those Revolving Debt Levels Sure Could Hurt

Consumers Spend More in December, But Ouch Those Revolving Debt Levels Sure Could Hurt

This morning the US Bureau of Economic Analysis published its take on Personal Income & Spending for December. We’re rather fond of this monthly report given the data contained within and the implications for several of our investment themes, including Cash-strapped Consumers as well as Affordable Luxury and the Rise & Fall of the Middle Class. 

So what did the December report show?

Personal Income rose 0.3 percent, far faster than in November, but still below the 0.4-0.5 percentage gains registered in September and October. We saw the same pattern with Disposable Income (which is a better barometer for discretionary spending), as one would expect to see during the holiday shopping laden month of December.

That’s as good a segue as any to remind our readers that holiday shopping during November and December came in stronger than the National Retail Federation had forecasted. The final tally was a year over year increase of 4.0 percent compared to the NRF’s 3.6 percent forecast.

Now you’re probably saying to yourself, “How can that be given all the bad news that we’ve been hearing from Macy’s (M), Target  (TGT), Kohl’s (KSS), Sears (SHLD) and other brick and mortar retailers?”

To be honest, we doubt the average person would have thrown in the “other brick and mortar retailers” part, but we know our readers are smarter than the average bear.

The answer to that question is that non-store sales, Commerce Department verbiage for e-tailers like Amazon (AMNZ), eBay (EBAY) and digital Direct to Consumer business like those found at Macy’s, Under Armour (UAA), Nike (NKE) and other retailers, rose 12.6 percent year over year to $122.9 billion. We certainly like those stats as they confirm several aspects of our Connected Society investing theme, but we would argue a more telling take on the data is that non-store sales accounted for 19 percent of holiday shopping in 2016, up from 17 percent the year before. Nearly one-in-five shopping dollars was spent through online or mobile shopping.

We’ll get a better sense of this shift, which we only see as accelerating, later this week when both United Parcel Service (UPS) and Amazon report their quarterly results for the December quarter. Team Tematica will also be listening to Direct to Consumer comments from Under Armour and other apparel and footwear companies as they too report quarterly results over the next few weeks.

Now let’s take a look at December Personal Spending – it rose 0.5 percent, a tick higher than was expected. Given the NRF data above, it was rather likely we were going to get a better print vs. expectations.

In combining both the income and spending data for the month, we get the savings rate, which fell to 5.4 percent, a five-month low. Compared to a few years ago, that savings level looks rather solid even though it’s well below the longer-term trend line. What we do find somewhat disconcerting, given the prospects for the Fed to boost interest rates up to three times this year after only doing so just two times in the last two years, is the amount of revolving consumer debt outstanding. As evidenced in the graph below, those levels have continued to climb steadily higher during 2015 and 2016.

Should interest rates move higher in 2017, the incremental interest expense could crimp consumer wallets, reducing their disposable income in the process. To us, that could mean less Affordable Luxury or even Guilty Pleasure spending as more become Cash-strapped Consumers.

Retail Sales a Warning?

Retail Sales a Warning?

Retail sales flashing a warning?  Sales have recently taken a serious pounding, which many claim is due primarily to the awful winter weather in much of the US.  While the tough winter undoubtedly did have an impact, the chart below (which shows the month-over-month percentage change in retail sales and the quarter-over-quarter percentage change in US GDP) indicates to at least to yours truly that there is a bit more to the story.

Retail Sales


Since November 2014, sales have dropped over 3%.  The only time the drop has been larger was from June 2008 to December 2008 when sales fell by 13%.   Retails sales have declined in 4 of the past 6 months and 8 of the past 12 months.

If we look at the broader picture of the consumer we see that:

  • Consumer Confidence has fallen in 3 of the past 4 months and  7 of the past 12 months (trend is worsening)
  • Personal Income has fallen in 6 of the past 12 months
  • Personal Spending has fallen in 4 of the past 7 months and 5 of the past 12 (trend is worsening)
  • Jobless claims have risen in 4 of the past 6 months and 7 of the past 12 (trend is worsening)
  • Average hourly earnings have declined in 5 of the past 6 months and 8 of the past 12 (trend is worsening)
  • Challenger job cuts have increased every month over the past 4 months (Not good!)

For the economy as a whole, Bespoke Investment Group’s summary of economic indicators is currently at its worst reading in a year and has only improved in one of the past 6 months!

It certainly does not look to us like this is an economy about to overheat, needing the Fed to tightening the monetary belt!  While it is foolish to believe one can accurately predict the behavior of bureaucrats, it certainly doesn’t look like the Fed has a compelling reason to tighten rates in June.  We believe it likely they will hold off raising rates until the data coming in looks stronger than it does today.

Just what data is the Fed seeing?

Just what data is the Fed seeing?

Funny-Images-33On Monday March 3rd, the NASDAQ closed above 5,000 for the first time since 2000, while the S&P 500 and the Dow Jones Industrial Average also reached new record highs, which would lead one to think that things are going pretty darn well. According to Chris Verrone of Strategas Research Partners, 70% of US stocks are currently in an uptrend. In comparison, at the NASDAQ’s previous March 2000 peak only 25% of stocks were in an uptrend.

Unfortunately outside of the US, central bankers don’t look like they are feeling quite as rosy as American equity investors. So far in 2015 at least 21 central banks have lowered their key interest rates in an attempt to strengthen their economies. China surprised the markets with a rate cut last weekend, after having early in February made a system-wide cut to bank reserves. India cut its main interest rates just last week for the second time in less than two months followed by Poland, which cut rates March 4th. So much for a growing global economy, and our view is if the guys in the center of it all think the punch bowl needs to be spiked, perhaps we need to look deeper.

Just what data is the Fed seeing?

Last week Janet-I’m-not-tellin-Yellen reported the domestic economy is looking better, not great, but better. We’re wondering just what data she was looking at because so far this week alone we’ve seen the following:

  • Monday we learned that Personal Income rose less than expected, (0.3% vs. expectations of 0.4%) while Personal Spending came in below expectations, (-0.2% vs. expectations of -0.1%) in January. That’s two in a row for spending whiffing it.
  • Markit Manufacturing PMI beat expectations, up from 53.9 to 55.1 vs. expectations of 54.3.
  • ISM manufacturing index fell in February to 52.9 from 53.5, for the fourth consecutive monthly decline
  • ISM non-manufacturing index beat expectations at 56.9 in February vs. 56.5 estimates.
  • Construction spending unexpectedly fell1% in January.
  • Six of the top seven auto manufacturers on Tuesday reported year-over-year sales increases in February, but all fell short of expectations.
  • This morning we learned private-sector job creation for February was below expectations with companies adding 212,000 positions versus expectations of 220,000 while also dropping from the 250,000 in January.
  • U.S. crude oil supplies rose to yet another record high last week, with crude-oil stocks at their highest level since 1982 on a weekly basis. Stockpiles rose by 46,000 barrels during the week versus expectations of a 1.8 million drop; keep in mind we’ve already seen operational oil rigs drop by about 1/3.

Well what about prior reports? From the economic data released during the month of February, forty-two were below expectations, (the aforementioned personal spending, construction spending, factory orders, retail sales, business inventories, housing starts, building permits, industrial production, and capacity utilization) while only six beat expectations, (including nonfarm payrolls, Case-Shiller Home prices and Markit Manufacturing PMI). Kinda makes one wonder exactly what Yellen was looking at let alone feeling good about.

Oh wait, there’s the love! Turns out there is no lack of (at least) self-love in the markets as companies last month announced a record $104.3 billion in planned repurchases, which is the most since TrimTabs Investment Research began tracking the data in 1995 and nearly twice the $55 billion from last year. To put that number in context, buybacks will amount to about $5 billion in purchases every day, which is about 2% of the value of all shares traded on U.S. exchanges, according to Bloomberg, which also estimates that earnings from S&P500 members will decline by at least 3.2% this quarter and next, with full year growth at 2.3% versus 5% in 2014.   With executive pay often linked to share price, it shouldn’t come as a surprise that companies in the S&P 500 spent about 95% of their earnings on repurchases and dividends in 2014… oh did we just say that out loud?

In the bond market, negative bond yields currently account for about $2 trillion of debt issued across Europe. Just this week Germany sold five-year bonds at a negative rate for the first time ever. Why would anyone buy bonds with negative yields? The ECB is set to begin rather large purchases of sovereign bonds in the coming months, which will likely push yields even lower. That could allow a negative yielding bond to actually experience a capital gain as bond prices are pushed lower. The ECBs move is also likely to push the euro even lower against the dollar, and as we discussed at the opening of this piece, central banks around the world are lowering their rates, which devalue their currencies… at least relative to currencies that aren’t lowering rates, which right now is basically the dollar. All this is a surreptitiousness form of monetary tightening, of which we are sure the Fed is well aware.

But what about last Friday’s (March 7th release) February Employment report.  The headline for the jobs report boasted 295,000 jobs being created during February, a big beat relative to the 240,000 jobs economist forecasted. The second headline pointed to a drop in the Unemployment Rate to 5.5%. That got everyone in an excited tizzy that the economy is finally really going strong and oh goody-goody-goody we can’t wait to see the next retail sales report!

As always, it pays to dig a bit deeper.  When we do, we find a lot of people continued to drop out of the labor force in February and that was the real driver behind the drop in the unemployment rate. Tough to argue that the jobs situation is all champagne and roses when lots of people decide it just isn’t worth it.  The chart below says it all – unemployment rate falling right along with those who simply leave the workforce.

umeployment and participation

Additionally, wage growth was once again modest in February with a pittance 0.1% increase. Hours worked during February declined, which could be thanks to the snowy weather and port disruptions – we continue to hear from companies like Macy’s (M), Gap (GPS) and others that both will weigh on growth in the current quarter.  The number of construction jobs created in February fell 40% month-over-month.

Most importantly the quality of jobs created remains problematic as leisure & hospitality was the big winner in February, continuing the trend we’ve been watching for some time as a good portion of the post-crisis job creation has been of lower quality than the jobs that were lost. For example, mining/logging lost 8,000 jobs, (which tend to be higher paying) while retailers (which tend to be lower paying) contributed 32,000 jobs. Makes you think about just how many “Do you have this in a small” jobs it takes to replace one highly skilled mining job. On that note, if the job situation is so rosy, why has personal spending declined for two months in a row?